Name That Trade – $XRT: Retail Wagging the Dog?

by Dan October 23, 2015 3:05 pm • Commentary

U.S. retail stocks are noticeably weak today, with the XRT, the S&P retail etf down 1.5% vs the S&P 500 (SPX) up 1.25%, and the Nasdaq Composite up 2.5%.  There are a couple ways to think about this. Amazon’s (AMZN) results last night may emphasize the growing disparity between those retailers with a vast online offering with cheap pricing and fast delivery/shipping options, and those that continue to struggle online (WMT/M/TGT).

Today’s retail weakness is more likely the result of poor results and guidance from VF Corp (who owns different apparel brands) and Whirlpool (WHR) who both struggle with dollar strength and tepid retail demand.  Adding to the weakness is the two day decline in Under Armour (UA) of about 8%. The company reported a strong Q3, but issued guidance suggesting gross margins will be below consensus due to rising inventories and higher costs associated with managing inventory.

And, on a week where oil is down and the dollar is up one would think that retailers like Kohl’s (KSS) and Macy’s (M), that cater to mid to low end U.S. consumers and should benefit from low gas prices (and don’t have the headwinds from dollar strength) should have a bid, but both are making new 52 week lows.

So you get the picture, AMZN is killing everyone (but they are just one retailer), the dollar is hurting multi-nationals, and low oil doesn’t appear to be helping the U.S. consumer.

Massive Relative Under-Performance for Retail:

Today we have the Nasdaq breaking out to a 2 month high, above the 200 day moving average, and importantly above the late August breakdown level on massive volume:

Nasdaq Composite 1 year chart from Bloomberg
Nasdaq Composite 1 year chart from Bloomberg

The SPX doing similarly, now just 2.5% from its prior all time highs, and very close to what I would say is massive technical resistance at 2100:

SPX 1yr chart from Bloomberg
SPX 1yr chart from Bloomberg

And then there is the XRT, which many of its holdings fall within the specific SPX sector consumer discretionary which make up 13% of the SPX.  The XRT is down 4% on the year (it does not have AMZN in it which is powering alot of the consumer discretionary etf XLY’s gains), and down 13% from its 52 week high made in March. The two year chart below shows technical resistance at $46, and decent support at $42:

XRT 2 year chart from Bloomberg
XRT 2 year chart from Bloomberg

It’s becoming fairly apparent that we are in a market where you want to keep pressing what is working (see AMZN & GOOGL), try to pick up beaten up crap when it appears we are on the precipice of a performance chase (see PG today, industrials this week) and sell weak fundamentals on rallies (see energy and retail).

So the question you have to ask yourself, given the increasingly positive sentiment towards U.S. equities, is whether or not retail stocks are getting too oversold in front of what should be a seasonally strong period into the holidays?  On the flip-side, if the broad market rally has run its course as the SPX approaches important resistance in front of next week’s FOMC meeting that could be the impetus for a sell-off, as was the case following their Sept meeting.  If you have conviction and an answer to the above questions, you might want to consider one of the following options trades to express a short term view with defined risk.


XRT ($44.85) Buy Dec 45 call for $1.20

Break-Even on Dec Expiration:

Profits: above $46.20

Losses: of up to 1.20 between 45 and 46.20, max loss of 1.20 below 45

Rationale: short dated options are reasonably priced, and would look to spread the long call on a move through the strike.


XRT ($44.85) Buy Nov 44.50 / 42 put spread for 60 cents

Break-Even on Nov Expiration:

Profits: between 43.90 and 42 of up to 1.90, or 3x the premium at risk.

Losses: of up to 60 between 43.90 and 44.50, max loss of 60 cents above 44.50

Rationale: The etf is showing weakness relative to the broader market and if there’s a breakdown coming towards the August lows, it’s likely to be sooner rather than later. This spread targets those lows with a decent risk reward and defined risk.